Stony broke – fresh rumblings from Northern Rock | FT Alphaville

Stony broke – fresh rumblings from Northern Rock

Just across the wires:

20/11/2008 07:38:17 GraniteMaster IssPLC – Non-asset trigger event

Granite is Northern Rock’s master-issuer trust and as the below graph, reprised from a Deutsche note, shows, the bedrock of the UK mortgage-securitisation market.


And a non-asset trigger event is a problem. Not just for Granite, but for Northern Rock, by extension the government, and beyond that, the UK mortgage market as a whole.

Northern Rock might be nationalised, its creditors and depositors guaranteed by HM Government. But the underlying securitisation vehicle – some £38bn of housing assets – has to fend for itself.

A non-asset trigger event means that Northern Rock – the company – will no longer receive any payments from Granite – the trust – until all the trust noteholders have been repaid. In mortgage-securitisation legalese (from the Granite prospectus):

If a non-asset trigger event has occurred and until the occurrence of an asset-trigger event, the mortgages trustee will distribute all principal receipts to Funding 2 and Funding until the Funding 2 share percentage and the Funding share percentage of the trust property are each zero and will thereafter apply all principal receipts to the seller. Funding 2 will, for each monthly payment period following the occurrence of a non-asset trigger event, allocate and apply these principal receipts received by it from the mortgages trustee, after providing for and/or making the requisite payments to the Funding 2 liquidity facility provider (if any), the Funding 2 reserve fund and the Funding 2 liquidity reserve fund (if any) fo each such monthly payment period, towards the amounts due on the loan tranches on any monthly payment date falling in the relevant monthly payment period as follows:

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The reason for this trigger is that Northern Rock has failed to maintain its minimum seller share level.

The minimum seller share is an overcollateralisation test. It’s basically an equity cushion-cum-first loss tranche, provided by Northern Rock, which protects the bondholders.

Failing it is not good. For one thing, it will likely spell severe rating downgrades. The minimum seller share was a crucial support feature for most rating assesments. Those downgrades could in turn trigger further, ratings-based, triggers.

Then there’s the fact that for Northern Rock itself, this could potentially lead to the total loss of its remaining multi-billion “seller share” in Granite.

It’s also concurent with a more severe problem: the underperfomance of the mortgages in the Granite Master Trust, and the possibility that the trust is beginning the slide down a slope which will abruptly end with a rather large “cliff risk”: liquidation.

That might happen if the trust breached some of its more serious covenants.

What with Northern Rock the company giving the trust a pretty clear ‘you’re on your own’ signal with today’s failure to meet the minimum seller share level, and with UK mortgages performing as they are, liquidation – or at the least, acceleration and possible losses for the subordinated noteholders – is not a million miles away.

Liquidating a trust like Granite would, of course, be disastrous if not impossible. A more likely outcome might be some kind of restructuring. Even an acceleration – in which a “true” credit waterfall is enforced and noteholders are paid sequentially – would be damaging since it would harm – severely – the reputation of the UK mortgage securitisation market. If the graph above didnt make clear, we’ll reiterate: Granite is the single biggest funder of the UK mortgage market.

Related links
National Granite – FT Alphaville
From Granite to Mound… UK mortgage trust nomenclature (and performance) – FT Alphaville